The present invention relates to a business management tool and, more particularly, to a new and useful method for identifying, evaluating and responding to risks associated with a business operation, such as in a financial institution.
Effective business management depends on many different factors, including personnel, facilities and systems. Small businesses can be operated relatively efficiently when the scale of business operations is such that the owner can easily know how each aspect of the business is doing. Once a business grows so that additional tiers of management are needed, it becomes increasingly difficult for a single person to effectively understand how all parts of the business are operating. Often, the details of how parts of a business operate are lost as information about each part flows upward in summaries and status reports. At the same time, it is not efficient for an upper-level manager or medium to large business owner to constantly oversee each individual operation of the business.
Many factors affecting the overall operation of a business can be measured and quantified using definite values. For example, most companies prepare and review balance sheets and income statements to evaluate their health and operating efficiency. These statements measure and quantify the financial health of a company by taking a “snapshot” of the company's financial position at a given moment in time.
Another important criteria that can be evaluated for a business is the risk associated with different facilities, activities and functions of the business. Generally, risk is a measure of the potential loss versus gain for any given act or omission related to a business operation. For a given risk, there are levels, or values, which quantify the risk and can be used to determine if the risk is too great to be acceptable. If the risk associated with a particular business can be managed effectively, the business should operate efficiently and remain a viable, ongoing concern.
The operation of a business often entails many different aspects and details which are sometimes difficult to compile and present in a manageable format to the persons in position to act on the information. Different risks to a business may exceed planned parameters set to help manage the particular risks, but that information does not reach the management due to lack of communication or information systems breakdowns. In such a case, the risks to a business become unmanaged, and the likelihood that the business will fail or perform less efficiently is greatly increased.
Therefore, it is especially desirable to provide business management, especially at the board of directors level, with a concise, efficient and prompt mechanism for reviewing risk factors which may proliferate through voluminous reports that encompass complex and numerous business operations. The provision of such mechanisms can become especially important in the operations of financial institutions, such as banks, since early identification and assessment is needed to assure sound fiscal management and detect potential fraud.
Several patents disclosing predictive methods for evaluating risk and offering risk management tools for businesses are known.
U.S. Pat. No. 5,963,910 describes a computer-based management system that enables users to optimize a strategy for defining overall risk management choices. “Predictive metrics” are employed for quantifying outcomes of a particular business mission. A predictive metric is a parameter that can be measured and controlled by the agent, e.g. a manager, responsible for controlling the desired outcome. A software program evaluates and optimizes business strategies based on the mission and prioritized desired outcomes. The software uses data processing subroutines to analyze the relationship between sets of data and determinative factors, such as predictive metrics, are formulated to identify factors which yield an optimal solution. The determinative factors are linked together, so that optimizing one factor will cause the program to evaluate its negative effects on other factors. Multiple strategies can be evaluated using the program by changing the mission and the input priorities, as well as other variables.
Factors are evaluated using predictive metrics which are normalized on a scale of 1–10 and then prioritized based on the normalized value. The value can be displayed graphically using a bar which is sized proportionately to the value. Depending on the desired outcome, the predictive metrics are ranked from highly desirable to unimportant. FIGS. 19–23 of U.S. Pat. No. 5,963,910 show the ranking and table display of the predictive metrics (referred to as Appendices A-1 to A-5 in the description of the drawings at column 12). The metrics are preprogrammed as part of the software based on prior selection and/or research.
U.S. Pat. No. 5,696,907 relates to a system and method of conducting risk and credit analysis of financial service applications, such as car loan applications. A pre-programmed neural network computer is used to make decisions normally made by a credit manager. Related data in each application are placed together in groups, such as employment stability, credit history, etc. Each group contains variables used to evaluate the risk and credit.
The variables that are used by the system are then quantified as numeric or categorical values. Prior history data is entered to produce a range of values for each numeric variable. The range of values is normalized. Then, the vulnerability of each categorical data is determined by mapping what proportion of prior applicants in each category have produced unacceptable results minus what proportion have produced acceptable results. A series of heuristic rules are programmed and the prior history data is processed using the rules and regression analysis to weight the different variables. Data from a new application may then be processed against the weighted neural network system to determine if the application will be approved or denied.
U.S. Pat. No. 5,852,811 teaches a program for managing personal financial information. One aspect of the invention includes an assessment of the investment risk preferences of the user. A report can be generated to assist the user in selecting investments based in part on the risk preferences input previously. The report prioritizes the investments based on programmed optimization functions using the input from the user and available financial data. A specific report form and risk assessment method is not provided.
Other patents of interest teaching database methods include U.S. Pat. No. 5,227,967 for a method of managing security instrument data using categorized information stored in a database. First, different types of investment assets are categorized by attributes. The attributes are in turn placed in functionally related groups. For a given security instrument, only data for the attributes contained in the functionally related groups identified with that type of instrument is stored and retrieved to make reports about the status of that instrument.
U.S. Pat. No. 3,703,630 discloses a monitor board for identifying the utilization of production facilities using luminescent strips. Different products are identified at different locations on the board. The amount of lighted strip is proportionate to the quantity being displayed. A computer having an optimization program drives the display and can show percent use, marginal cost of production and other numbers associated with product production using limited plant facilities. The computer and monitor board are used to provide rapid “what if” analysis of one or more production facilities.
A task management system incorporating a bar chart in which the area contained by each bar represents the amount of resources needed can be found in U.S. Pat. No. 5,016,170. A computer-driven composite display of many related tasks is assembled by determining the tasks to be completed and showing the tasks as rectangular bars. The orientation and sizes of the bars relative to each indicate dependency of completion of one task on another and the time and resources needed to complete each task. The system is particularly well suited to construction crew management. Values for bars may be adjusted by changing the inputs to the computer, driving the display.
U.S. Pat. No. 5,095,429 is for a financial information system having a provision for prioritizing data. Data is entered into a cell in an input window. If the cell is locked, it is prioritized over data previously entered in other cells, and any recalculation is based on the locked cell, which is not permitted to change.
None of the prior systems provide or suggest a method for evaluating and managing risk by selecting criteria and assigning both risk and relevancy levels. While one of the prior methods is an evaluation method using weights to prioritize factors, the values of the factors are not taken from current business operations and are predictive metrics only. Similarly, the prior credit risk evaluation method uses normalized prior numeric data to determine the vulnerability of a particular category of data, and then it compares new application data using programmed rules and preset vulnerability calculations for each criteria. Each piece of application data is not evaluated for compliance with a standard, but rather, a rule is applied to combined data in order to predict future performance based on prior results.
A method for providing a snapshot of the current levels of risks associated with the operation of a business is needed to help evaluate business performance and assess compliance with standards set by the owner or Board of Directors, identify otherwise undetected risks and aid in the overall management of a business.